Friday, September 08, 2006

RBC, TD Buoyed by Enron Ruling

As U.S. judge dismisses similar case, CIBC wonders if it folded its hand too early

The Globe and Mail, Andrew Willis & Paul Waldie, 8 September 2006

Royal Bank of Canada and Toronto-Dominion Bank are pushing to put $800-million of Enron woes behind them in the wake of a Texas judge's decision to toss out an Enron lawsuit against Barclays Bank PLC, a decision that's causing $2.4-billion worth of second-guessing at CIBC.

RBC and TD are among six banks battling a group of former Enron shareholders who are suing the failed utility's lenders for $40-billion (U.S.), and the pair have set aside up to $800-million against possible losses.

This summer, Barclays became the first bank to appear in court in Houston over the class-action allegations.

In late July, Barclays was totally vindicated, as U.S. District Judge Melinda Harmon ruled the investors had no claim against the London-based bank.

In the wake of that federal court decision, RBC and TD have renewed their applications to have their own Enron lawsuits dismissed, and Barclays' lawyer said Judge Harmon's ruling could apply to the Canadian banks.

David Braff, a New York lawyer who represented Barclays, said in an interview yesterday that the key point in the ruling "is that Barclays isn't alleged to have deceived the public. The allegation the plaintiffs make, at best, amounts to something other than deception of public shareholders."

The judge "is essentially saying that under the U.S. securities laws there is no private right of action for aiding and abetting, and that at the very most, if the plaintiffs could prove everything they claim, it would amount to nothing more than aiding and abetting [by the banks], which is not allowed as a private cause of action."

Spokespersons for TD and RBC confirmed they are aware of the Barclays decision and have applied to dismiss the class-action suit, but would not comment on the specifics of a matter that is still before the Texas court.

TD and RBC aren't clearly off the hook.

Mr. Braff said the judge indicated that she will assess each bank's case on an individual basis to determine whether they violated securities laws, "including that they did something more than aiding and abetting." And lawyers representing the Enron investors have asked the judge to reconsider her ruling.

After Enron collapsed in 2001 and the $40-billion lawsuit was filed by a group led by the University of California's pension fund, several of the utility's banks opted to settle the suit out of court rather than risk a trial in Texas. The strategy was based in part on the courtroom experience of companies such as funeral operator Loewen Group Inc., which was ultimately brought down by an unexpected $500-million settlement imposed by a Mississippi jury, an award that arose out of an $8-million dispute.

Enron shareholders have recovered more than $7-billion from five of the company's lenders, including a $2.4-billion contribution by Canadian Imperial Bank of Commerce last year. The CIBC settlement marked the biggest recovery so far for the Enron investors, and translated into a $1.91-billion (Canadian) quarterly loss for the bank, the largest hit in its 138-year history. At the time, CIBC chief executive officer Gerry McCaughey said the bank settled to "reduce uncertainty and risk."

"Some of the CIBC directors are questioning the decision to settle in the wake of Barclays' win," said one bank executive. However, an executive at a rival bank said: "The CIBC deal was done in the wake of similar settlements at Citibank and JPMorgan. You have to judge the decision in the context of the circumstances."

In the decade running up to Enron's failure, most global banks did business with the Houston-based energy company. RBC and TD participated in many deals with Enron that were similar to Barclays'.

For example, TD worked with Barclays and two other banks on several "prepay transactions" that Enron allegedly used to disguise billions of dollars in loans as commodity trades. According to court filings, these deals "were a powerful tool that Enron used to manage its reported financial condition and satisfy rating agency expectations."

CIBC and Barclays were among a group of banks involved in helping Enron set up dozens of so called "special-purpose entities," which the company allegedly used to disguise billions of dollars in loans. The Enron investors alleged Barclays bankers had an "extensive and close relationship" with the utility that included "constantly" interacting with senior Enron executives, along with participation in $3-billion (U.S.) of loans and $2-billion of security sales.

The now-dismissed lawsuit stated Barclays helped Enron chief financial officer Andrew Fastow build his now infamous Star Wars-themed partnerships, named Jedi and Chewco, which the company used to hide its debts. In tossing out the claim, Judge Harmon ruled: "None of these statements is adequate to state a violation."

RBC set aside $500-million last year to cover potential legal costs associated with Enron, while TD struck a $300-million reserve. Should the Enron suit be dismissed, these provisions could be reduced, providing a one-time profit boost.

The only banks remaining in the class action are RBC, TD, Merrill Lynch, Credit Suisse First Boston, Deutsche Bank, and Royal Bank of Scotland, which is rumoured to be settling for more than $100-million.